New mutual-fund share classes
being developed as a result of the Department of Labor's looming fiduciary rule
will likely save investors at least 0.50% in returns when compared with the
current selection, according to a new analysis published by Morningstar
Mutual fund companies have been rolling
out new fund share classes — T shares and clean shares — in preparation
for the rule, which raises investment-advice standards in retirement accounts
such as IRAs.
These mutual fund breeds have
compensation structures seen as less conflicted, and supplant the "uneven
and opaque fee structure we observe with A shares," said report co-authors
Aron Szapiro and Paul Ellenbogen, respectively the director of policy research
and head of global regulatory solutions at Morningstar.
"Early evidence suggests
that the asset management industry is adapting in ways that will benefit
investors by reducing conflicts of interest and adding transparency,"
according to the analysis.
"We think that 50 basis
points is a reasonable estimate of savings to investors from reducing
conflicted advice," the report said. "Precisely how much T shares
will save investors is an open question that we will be able to address more
authoritatively after we have some experience with the new regime."
As an example, using a T-share
over an average A-share fund could equate to roughly $1,800 in extra IRA assets
per $10,000 invested over a 30-year period, Morningstar said.
Morningstar anticipates mutual
fund companies will create 3,500 new T shares in the coming months for IRA
investors. Some companies such as American Funds, Janus and MFS offer clean
shares, and Morningstar expects others to follow suit.
The reason for their emergence is
the conflict between the traditional mutual fund structure and the DOL fiduciary
rule, which requires financial institutions to set advisers' compensation in
such a way that they don't benefit from recommending one fund over another to
The implementation date of the
regulation, which was recently delayed by 60 days, is set to begin June 9.
The front-end sales charge on
A-share funds varies depending on the fund and asset class, which creates a
potential incentive for advisers to recommend certain funds that may not be in
an investor's best interest but pay advisers a higher commission, the report
T shares, however, charge the
same commission across all eligible funds, most of which will charge a 2.5%
maximum front-end load, according to Morningstar. That also benefits investors
because it's lower than the 5.75% commission that's most common maximum load
for A shares.
Clean shares, though, are
"the best way to enhance transparency" in the long term, according to
the report, titled "Early Evidence on the Department of Labor Conflict of
Interest Rule," published on April 13.
Such funds, unlike T shares,
won't have sales loads or bundle in annual 12b-1 fees for fund services.
Rather, they'll charge only an asset management fee and allow the brokerage to
layer its fees on top.
Of the 0.50% in
"ballpark" cost savings these funds will offer to investors,
Morningstar estimates 0.30% will be attributable to "manager skill in the
form of alpha" and 0.20% from reduced fees when compared to
In addition, Morningstar expects
an additional 0.20% in savings due to the incentive to recommend an investment
that's in the best interest of the investor. Investors are also likely to
receive an additional cost benefit from broker-dealers cutting some funds
from their shelves, especially ones that are higher-cost, according to the
here for the original article from Investment News.